The decision of the lenders consortium which met in Mumbai on Thursday indicates a new urgency in dealing with lakhs of crores of bad loans in the steel sector.The three companies between them owe banks nearly Rs 1 lakh crore. By early next week, SBI will file applications at the National Company Law Tribunal for these three companies under the Insolvency and Bankruptcy Code.

Essar Steel owes lenders Rs 44,000 crore, Bhushan Steel Rs 47,000 crore and ElectrosteelRs 10,200 crore. Authorising SBI to decide on these loans removes the biggest hurdle of infighting between banks and empowers them to negotiate from a position of strength, two bankers familiar with the move said.

The lenders, and the management and promoters of these companies will have 270 days to resolve the problem after the NCLT admits the applications. The reorganisation could involve a restructuring of the debt or a consolidation with two companies merging.

This could make the combined entity bigger, infuse new capital into the company and the lenders could respond with easier loan terms.

Rating companies optimisticDetails of the consolidation, if at all it is agreed to, will be worked out during the bankruptcy process, the bankers said. Lenders are grappling with the enormity of loan reorganisation under the bankruptcy law after the regulator ordered them to do so for a quick resolution of the mountain of bad debt which is now about 9 per cent of total banking assets.

“That apart, a few consulting firms made a presentation for being selected as insolvency professional,” said one of the bankers without disclosing the names. Rating companies are optimistic about the development in the steel industry after years of dithering and excess capacity left them in a bad shape.

“We feel that the insolvency proceedings for stressed accounts may lead to consolidation in the steel sector, whereby stronger steel players with healthy financial profile would have a chance to increase their market share by bidding for these assets at attractive valuations,” said Jayanta Roy, senior vice-president at ICRA.

“In such a scenario, the steel sector, faced with a weak demand and an overcapacity situation would benefit in the long run.”